Visualant, Inc. — Form 10-Q Summary
Entity and period: The supplied filing is for Visualant, Inc. and subsidiaries, not USBC, Inc. It reports the fiscal quarter ended December 31, 2014 (the three months ended December 31); financial statements are unaudited. The filing was signed February 10, 2015.
Business context
Visualant combines TransTech Systems, a distributor of security and identification products, with development and commercialization of its ChromaID light-based material identification technology. TransTech generated the majority of revenue. ChromaID was being marketed through lab kits and potential licensing, royalty, and service arrangements. An amendment to the IDMC agreement in November 2014 exclusively licensed ten filed patents to Visualant.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2014 | Prior-year quarter |
|---|---|---|
| Revenue | $1.843 million | $1.877 million |
| Gross profit / gross margin | $298,000 / 16.2% | $306,000 / 16.3% |
| Research and development | $119,000 | $313,000 |
| Selling, general and administrative | $653,000 | $843,000 |
| Operating loss | $475,000 | $849,000 |
| Net loss attributable to common shareholders | $3.157 million | $862,000 |
| Basic and diluted loss per share | $0.02 | $0.01 |
| Cash used in operating activities | $341,000 | $188,000 |
The quarter’s $2.651 million loss from changes in derivative liabilities was the principal driver of the larger net loss and was noncash. Management reported TransTech operating profit of $15,000, compared with $2,000 in the prior-year quarter.
- At December 31, cash was $87,319; current assets were $1.463 million and current liabilities were $9.468 million. The company reported a working-capital deficit of approximately $2.774 million excluding the $5.230 million warrant derivative liability.
- Total debt shown as notes payable and capital leases was $1.346 million, all classified as current; $166,500 of convertible notes was also current. The $544,524 secured receivables facility had $72,481 of availability and was due to expire June 12, 2015 unless renewed.
- Financing activities provided $355,000, including $300,000 from preferred-stock sales and approximately $56,000 from the line of credit. Cash increased by $16,933 during the quarter.
- Total assets were $3.225 million and stockholders’ deficit was $6.243 million. Accounts receivable rose to $980,117 from $815,460; inventory declined to $333,073 from $412,831.
Changes and unusual items
Revenue fell 1.8%, which management attributed to slightly lower TransTech sales. Gross margin edged down from 16.3% to 16.2%. Lower R&D spending and lower SG&A—principally legal, consulting, and other general expenses—reduced the operating loss by about $375,000. However, derivative-liability remeasurement changed from a small gain in the prior-year quarter to a $2.651 million expense, driving the deterioration in reported net loss.
In the quarter, Visualant raised $300,000 by issuing 3 million Series A convertible preferred shares, convertible into 3 million common shares, and issued Series C and D warrants for a further 6 million common shares. It also issued 25,000 common shares for consulting services. The common-share count was 168.19 million at quarter-end and 169.54 million on February 10, 2015.
Outlook, risks, and contingencies
- Going concern and funding: The filing states that substantial doubt exists about the company’s ability to continue as a going concern. Management expects operating losses to continue and says additional financing is needed to fund operations, debt service, and the business plan. It warns that failure to obtain funding could require restructuring or divestitures. No numerical revenue or earnings guidance is provided.
- Near-term obligations: The filing lists $1.346 million of notes payable, $166,500 of convertible notes, and $62,162 of operating lease payments due within one year, in addition to stated capital-expenditure commitments. Several $200,000–$300,000 related-party demand notes were extended to March 31, 2015; nonpayment or nonconversion could trigger a second lien on company assets. The secured credit facility balance was due at expiration or renewal in June 2015.
- Subsequent event: On January 27, 2015, the company borrowed another $64,000 from KBM Worldwide at 8%, due October 27, 2015, with a conversion price based on a discounted trading-price formula. Management expected to repay these notes when funding closed.
- Dilution and valuation: At quarter-end, 134.6 million warrants and 12.9 million options were outstanding, alongside convertible preferred stock and notes. Several warrants have down-round provisions, and the notes’ conversion formula may produce an uncertain number of shares. Changes in derivative fair values can materially affect reported earnings without corresponding cash flows.
- Business risks: ChromaID commercialization and licensing remain uncertain; some potential medical applications may require regulatory approval. Four major TransTech suppliers account for approximately 70% of its revenue. Customer and vendor concentrations are disclosed, and the filing identifies financing, intellectual-property, market-price, and key-personnel risks. No pending legal proceeding was identified as expected to have a material adverse effect.
- Controls: Management concluded disclosure controls were not effective because of a material weakness: the audit committee lacked a financial expert. Management said it expected to appoint an independent audit committee financial expert during 2015. The filing also notes a prior omission of a required advisory vote on executive compensation.
Important facts for investors to verify
- Whether Visualant obtained sufficient financing and renewed or repaid the secured credit facility and near-term related-party and KBM obligations.
- Whether ChromaID generated material customer, licensing, or royalty revenue, and the commercial impact of the IDMC arrangement and its revenue-sharing terms.
- The precise composition and fair-value reconciliation of the $5.230 million warrant derivative liability; the filing discusses separate warrant and convertible-note derivative valuations and a $2.651 million quarterly remeasurement expense.
- Potential dilution from outstanding warrants, options, preferred shares, and variable-price convertible notes, including any warrant exercise-price adjustments.
- Whether the company remediated the audit committee financial-expertise weakness and other disclosed governance and reporting-control issues.