Business context and reporting period
The supplied filing is Visualant, Incorporated’s Form 10-Q for the quarter ended June 30, 2016—not a filing identified as USBC, Inc. It covers Visualant’s fiscal third quarter and nine months ended June 30, 2016; interim financial statements are unaudited. Visualant develops ChromaID substance-identification technology, while its subsidiary TransTech, a personnel-identification products distributor, generates substantially all revenue.
Key financial results
| Metric | Three months ended June 30, 2016 | Nine months ended June 30, 2016 |
|---|---|---|
| Revenue | $1.833 million; up 18.5% year over year | $4.586 million; down 5.0% |
| Gross profit / margin | $338,000 / 18.4%, versus $256,000 / 16.5% | $751,000 / 16.4%, versus $784,000 / 16.3% |
| Operating loss | $475,000, compared with $654,000 | $1.789 million, compared with $1.851 million |
| Net income (loss) | $1.721 million, compared with $767,000 | $(595,000), compared with $(148,000) |
| Operating cash flow | Not presented separately for the quarter | $(1.857) million, versus $(150,000) |
Quarterly net income was driven substantially by a $2.835 million gain from revaluing derivative liabilities, partly offset by a $507,000 loss on debt conversion and $118,000 interest expense. The nine-month derivative gain was $1.966 million. These noncash valuation gains do not indicate profitable core operations. Nine-month interest expense was $255,000.
Balance sheet, debt and liquidity
- At June 30, 2016, cash was $277,000, accounts receivable $1.103 million, current assets $1.706 million, and total assets $3.055 million.
- Current liabilities were $7.230 million, including trade payables of $2.656 million, related-party accrued expenses of $1.289 million, derivative liabilities of $739,000, convertible notes of $957,000, and current notes payable of $1.548 million. Stockholders’ deficit was $4.174 million.
- Working capital was deeply negative: management reports a $4.785 million deficit excluding derivative liabilities; including them, the balance-sheet figures imply a deficit of about $5.524 million.
- All $1.548 million of notes payable were classified current. Separately, $957,000 of convertible notes were also current. The Capital Source facility balance was $748,000, with only $20,000 reported available, and was due for repayment or renewal in December 2016. Related-party notes totaling $600,000 matured September 30, 2016; the Umpqua loan of about $200,000 matured December 31, 2016.
- Cash increased by $195,000 during the nine months, principally because $2.047 million of financing cash inflows offset operating cash use. Financing included $925,000 of convertible-note proceeds, $505,000 from preferred stock, $383,000 from the credit line, and $349,000 from warrant exercises.
Changes, outlook and material risks
Quarterly revenue and gross profit improved year over year, while nine-month revenue and gross profit declined modestly. The nine-month net loss widened, and operating cash use rose materially. Management attributed quarterly sales growth to TransTech and said it expects losses to continue while commercializing ChromaID. ChromaID sales remain limited; management’s longer-term plan depends on product sales, licensing, royalties and related services. The filing provides no quantified revenue or earnings guidance.
- Going concern: Management states substantial doubt exists about the company’s ability to continue as a going concern, citing recurring losses, negative operating cash flow, limited capital and the need for additional working capital. It says cash on hand would fund operations only through approximately July 30, 2016 in one section and July 31 in another.
- Financing and dilution: The company relies on new debt and equity, including convertible securities and warrants with price-reset provisions that may produce substantial dilution. The filing cites approximately $2.861 million of loan obligations due in the near term.
- Series B investor dispute: After issuing 74,084 common shares upon conversion of preferred shares, the company denied additional conversion notices seeking 29,166 to 161,428 shares and expected to negotiate. It warns the dispute could lead to litigation and further share issuance.
- Related parties: The company reported $1.687 million owed to the CEO or affiliated entities, including loans, advances, unreimbursed expenses and compensation.
- Controls and contingencies: Disclosure controls were deemed ineffective due to a material weakness, including the absence of an audit committee financial expert. The company reported no material pending legal proceeding apart from the disclosed preferred-stock conversion dispute; it also cautioned that some potential applications may require regulatory approval.
Most important facts for investors to verify
- Confirm issuer identity: the provided metadata says USBC, Inc., while the filing identifies Visualant, Incorporated (ticker VSUL).
- Reconcile the MD&A’s nine-month cost-of-sales figure of $2.835 million with the financial statements’ $3.835 million; the latter aligns with reported gross profit.
- Verify near-term cash needs, debt maturities and whether the credit facility was renewed or obligations were refinanced after June 30, 2016.
- Check the resolution and potential dilution from the Series B conversion dispute, convertible notes and resettable warrants.
- Assess the company’s actual cash runway and progress toward ChromaID commercialization; the filing’s stated runway dates differ by one day.