Investors Should Avoid Nanosphere (NSPH) Due To Bleak Outlook

August 7, 2014 • Top News • Tags:

Nanosphere, provider of molecular diagnostic tests, reported poor Q2 results and a weak guidance for the remainder of 2014. As a result, the company is down over 30% due to management incompetence and lack of operational strategy.

Results

Nanosphere achieved Q2 2014 revenues of $2.7 million, a 44% increase over Q2 2013 but a drop over Q1 2014 figure of $3.3M. SG&A came in at $6.7M during the quarter, over double sales which contributed to a net loss of $10.1M.

Though the increase in SG&A was due to field sales and customer support expansion, the company experienced slower sales QoQ and revised guidance lower for full year 2014. Top line for the full year is expected to be $14M (with 175-200 new customer placements). This is down from the previous guidance of $19-21M (with approx. 200 new customer placements).

Expansion Strategy

Nanosphere is accelerating sales organization expansion in hopes of seeing top line traction. As a result, this is expected to further increase the SG&A expenses and widen the bottom line loss. Nanosphere should be concentrated on interrupting the losses, not extending them.

Management strategy is to cut costs that offset the SG&A increase and increase revenues with expanded margins. So, increased profit contribution and cost savings would match the rise in SG&A. Investors should expect lower R&D allocation which, in theory, will limit future operational advancements.

Unless Nanosphere finds a way to generate more profits from existing sales or raise prices, management’s scale strategy is a long shot. Acquisition should be the primary outlet if the company can demonstrate some sales traction from hospital placements, something I wouldn’t hold my breath over.

Financial Position

Nanosphere ended the second quarter with $21.8M cash balance. Assuming the company’s burn rate for the next 6 months remains constant at ~$19M, Nanosphere has funding until the end of 2014. Last May, Nanosphere entered into a loan agreement with Silicon Valley Bank, which would give the company access to an additional $10M. This $10M is available if Nanosphere can achieve at least $2.1M in sales during Q3 and remain listed on the NASDAQ (keep stock price above $0.75).

Additionally, Nanosphere will have the right to sell up to $30M of shares to Aspire Capital, an existing shareholder. Though this will dilute the company shares, Nanosphere will control the timing and amount of any sale of common stock as to minimize the damage done to shareholders. This is a last option resort for Nanosphere, which could be used in the next 12 months, especially considering the company is now approaching that $0.75 threshold of being delisted from NASDAQ.

Conclusion

Nanosphere’s incompetent management and lack of a effective strategy has resulted in the stock losing over 60% of its value YTD. Though the company has access to capital, it will result in dilution and a potential reverse split. I fail to see any benefit for current or potential investors of Nanosphere.

Nanosphere Future
What should Nanosphere's next move be?

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