Filing summary
Entity and period: The supplied filing is Visualant, Incorporated’s Form 10-Q, not a filing for USBC, Inc. It covers the fiscal quarter and six months ended March 31, 2017; financial statements are unaudited except where noted. Visualant develops ChromaID substance-identification technology and owns TransTech, a personnel-identification products distributor that generated substantially all reported revenue.
Financial performance
| Metric | Three months ended March 31, 2017 | Six months ended March 31, 2017 |
|---|---|---|
| Revenue | $1.497 million, up 2.0% year over year | $2.646 million, down 19.3% |
| Gross profit and margin | $305,000; 20.0% reported (15.0% prior year) | $495,000; 19.0% reported (16.0% prior year) |
| Operating loss | $263,000, versus $684,000 | $2.354 million, versus $1.197 million |
| Net loss | $1.045 million, versus $295,000 | $3.602 million, versus $915,000 in the statement of operations |
| Basic and diluted loss per share | $0.28, versus $0.24 | $1.04, versus $0.81 |
| Operating cash flow | Six-month use of $569,000, versus $1.188 million |
Six-month revenue and gross profit declined, while reported gross margin improved. The quarter’s operating loss narrowed, but net loss increased substantially, largely reflecting a noncash loss from revaluing derivative liabilities. Six-month results also included a $984,000 goodwill impairment related to TransTech. Research and development expense fell materially; management said RATLab no longer provided services.
Liquidity, debt and capital
- At March 31, cash was $152,000 and total current assets were $1.148 million, compared with current liabilities of $6.120 million. Management reported a working-capital deficit of approximately $3.605 million excluding the $1.368 million derivative liability.
- Current debt included $1.165 million of notes and long-term debt classified as current, plus $210,000 of convertible notes. The $365,558 Capital Source facility balance was due by June 12, 2017 unless the facility was renewed. The Umpqua loan of about $200,000 matured December 31, 2017; $600,000 of related-party notes were stated to mature March 31, 2017.
- The company reported owing CEO Ronald P. Erickson or affiliated entities approximately $1.500 million, including advances, expenses and compensation. The filing describes related-party financing and security interests.
- Six-month financing cash inflow was $500,000, including $330,000 of convertible-note proceeds and $300,000 from common and preferred stock, partly offset by debt repayments. Cash declined $37,000 over the period.
- Common shares outstanding were reported as 3,798,581 on May 18, 2017. Warrants for 5.151 million shares and convertible preferred stock, among other instruments, create significant potential dilution.
Outlook, risks and unusual items
- Management said cash on hand was expected to fund operations only through May 31, 2017 and that additional financing was needed for operations, debt service and the business plan. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern. If financing is unavailable, management may need to restructure, divest assets, scale back operations or consider bankruptcy.
- The company sought to raise up to $2.5 million through a best-efforts Series D preferred-stock and warrant offering; there was no assurance it would sell the planned securities. Equity financing could dilute existing holders.
- In May 2017, after quarter-end, the company disclosed a $250,000 Series D investment and a reduction of conversion and warrant exercise prices to $0.70 for specified outstanding securities. The transaction also triggered repricing provisions for other preferred shares and warrants.
- BioMedx repaid a note in full during the quarter for $290,608. The company had previously reserved the investment and reported a gain on collection; the filing’s discussion refers to a $250,000 gain.
- ChromaID had generated minimal revenue. Commercialization depends on customer adoption, external engineering and development resources, and strategic partners, including Intellicheck and Xinova. TransTech also had vendor concentration: four vendors accounted for approximately 61% of its revenue.
- Disclosure controls were deemed ineffective. Management identified material weaknesses involving the lack of an audit committee financial expert, delinquent SEC filings and insufficient segregation of financial-reporting duties.
- The filing says there were no material pending legal proceedings beyond ordinary routine litigation and no material off-balance-sheet arrangements. Management provided no specific revenue or earnings guidance.
Investor verification priorities
- Confirm the intended issuer: this filing identifies Visualant, Incorporated, not USBC, Inc.
- Verify current cash, financing availability, facility renewal or repayment, and the status of overdue or maturing related-party debt after March 31, 2017.
- Assess the terms, completion and dilution effects of the Series D financing and subsequent $0.70 repricing.
- Reconcile the filing’s stated six-month comparative net loss: the cash-flow statement shows $2.307 million for 2016, while the statement of operations shows $915,058.
- Review the derivative-liability valuation and goodwill impairment assumptions, as well as collection risk on the concentrated receivable for which the customer had made no payment since March 31, 2016.
- Track remediation of internal-control weaknesses, timely reporting, and progress in commercializing ChromaID and replacing external engineering support.