Business context and reporting period
The supplied filing is Visualant, Incorporated’s unaudited Form 10-Q for the three months ended December 31, 2013, filed February 13, 2014. This does not match the request metadata identifying USBC, Inc.; verify that this is the intended filing. Visualant combines TransTech’s security and authentication product distribution business with development and commercialization of its ChromaID optical-scanning technology.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2013 | Comparable 2012 period |
|---|---|---|
| Revenue | $1.877 million | $2.055 million |
| Gross profit / margin | $306,068 / 16.3% | $533,395 / 26.0% |
| Operating loss | $849,415 | $683,428 |
| Net loss attributable to Visualant common shareholders | $861,767 | $707,619 |
| Net cash used in operating activities | $188,394 | $559,137 |
| Ending cash | $51,553 | $602,077 |
- Revenue fell 8.7%. Gross profit declined 42.6%, and gross margin contracted 9.7 percentage points. Management attributed the revenue decline principally to $250,000 less Sumitomo license revenue, partly offset by $72,000 higher TransTech sales.
- Research and development expense rose to $312,987 from $166,379, largely for ChromaID commercialization and the IDMC agreement. Selling, general and administrative expense decreased to $842,496 from $1,050,444.
- Operating cash use improved year over year, but cash fell by $695,576 during the quarter, mainly reflecting $508,782 of financing cash outflow, described by management as debt repayment. Operating cash flow benefited from collections, lower inventory, and $201,130 of deferred revenue.
- At December 31, total assets were $3.328 million, current liabilities $6.907 million, and stockholders’ deficit $3.645 million. Cash was $51,553; accounts payable—trade was $2.121 million. The company reported a working-capital deficit of approximately $1.497 million excluding the $4.171 million warrant derivative liability.
- Total notes and lease debt was $246,241, almost all current. The BFI receivables facility had $241,653 outstanding, with $114,000 availability reported; the facility was due to expire June 11, 2014 unless renewed. A $200,000 Umpqua Bank note was signed in December, with proceeds received January 14, 2014.
Material changes, outlook, and risks
- Sumitomo’s joint development agreement expired December 31, 2013; the parties were still defining their future commercial relationship. The associated license fee had been fully recognized by May 31, 2013.
- Under a November 2013 agreement, IDMC was to develop applications and file at least ten patent applications at its expense. Visualant shipped 20 ChromaID F12 Lab Kits to inventors in December and agreed to pause most kit sales for 140 days, subject to exceptions. The agreement includes revenue-sharing terms and a warrant for 14,575,286 shares at $0.20, subject to adjustment.
- Management expects operating losses to continue while ChromaID is commercialized and says additional financing will be needed. The filing states that financing may not be available on acceptable terms and that failure to obtain it could require restructuring or divestitures. The financial statements are prepared on a going-concern basis; management says conditions raise substantial doubt about continued operations.
- After quarter-end, the company borrowed $200,000 from CEO Ronald Erickson and/or related entities at an average 3% annual interest, due March 31, 2014. The company also had an accumulated deficit of $21.4 million.
- Potential dilution is significant: 128.1 million warrants and 12.7 million options were outstanding at December 31, compared with 165.3 million common shares outstanding. Warrant down-round provisions may reduce exercise prices and proceeds. Full exercise is not assured.
- Other stated risks include dependence on TransTech vendors that account for about 70% of its revenue, ChromaID’s unproven commercial prospects, possible regulatory approvals for medical applications, volatile and potentially restricted OTC trading, and limited insurance. Disclosure controls were deemed ineffective due to a material weakness: the audit committee lacked a financial expert.
Important facts for investors to verify
- Confirm the issuer: the supplied document is Visualant, Inc., not USBC, Inc., and confirm the intended reporting period.
- Check near-term liquidity, the BFI facility renewal or repayment, the Umpqua proceeds, and the repayment status of the post-quarter $200,000 related-party note.
- Review financing needs and the going-concern disclosure against cash, working capital, overdue liabilities, and any subsequent funding.
- Track progress and economics under the IDMC agreement, the 140-day sales restriction, ChromaID commercialization, and Sumitomo’s post-expiry relationship.
- Reconcile warrant accounting: the balance sheet reports a $4.171 million derivative liability; the notes show $3.661 million for the June placement warrants and $510,135 for the IDMC warrant. The statements report a $12,865 net gain on warrant remeasurement, while the notes describe a $523,000 gain and $510,135 expense.
- Assess dilution and potential warrant repricing, and verify remediation of the disclosed control weakness and the planned audit committee financial-expert appointment.