Visualant, Inc. — Form 10-Q Summary
Entity and period: The filing is for Visualant, Inc. and its subsidiaries, for the three months ended December 31, 2011 (the company’s fiscal first quarter), compared with the three months ended December 31, 2010. This differs from the request metadata naming USBC, Inc.; verify that this is the intended filing.
Business context
Visualant develops Spectral Pattern Matching (SPM), an optical sensing technology aimed at security, authentication, anti-counterfeiting, quality control and diagnostic applications. Its wholly owned subsidiary TransTech distributes security and authentication systems. Management describes TransTech as a potential distribution channel for SPM products and identifies commercialization, licensing, sales development and improved profitability as priorities. The filing reports a U.S. patent issued in January 2012, after quarter-end, and additional applications pending.
Financial results and liquidity
| Metric | Q1 2012 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $1,812,853 | $2,067,865 | Down 12.3% |
| Gross profit | $323,248 | $413,204 | Down 21.8% |
| Gross margin | 17.8% | 20.0% | Down about 2.2 percentage points |
| Operating loss | $(511,580) | $(239,247) | Loss increased |
| Net loss attributable to Visualant shareholders | $(559,621) | $(259,772) | Loss increased |
| Basic and diluted loss per share | $(0.01) | $(0.01) | Unchanged as reported |
| Net cash from (used in) operating activities | $(77,478) | $319,557 | Shifted to cash use |
Research and development expense was $39,000, versus $6,000. Selling, general and administrative expense increased to $795,828 from $646,451. Management cited approximately $422,000 of non-cash expenses in the quarter, including depreciation and amortization, stock-related compensation and debt-discount amortization. The prior-year quarter’s revenue included a one-time sale, according to management.
At December 31, 2011, cash was $71,236, current assets were $1.67 million and current liabilities were $4.95 million, resulting in a working-capital deficit of approximately $3.28 million. Total assets were $4.23 million and stockholders’ deficit was $1.77 million. Accounts receivable were $753,048 and inventory was $497,636.
Debt disclosures include $2.62 million of notes, capital leases and long-term debt, of which $1.61 million was classified as current, plus $1.075 million of current convertible notes payable. The BFI secured credit facility balance was $578,483. The filing also identifies a $650,000 payment to James Gingo due in June 2012. Interest expense was $58,538 for the quarter.
Cash used in operations was partly offset by financing cash inflows of $53,102, including common-stock proceeds and line-of-credit borrowings. Cash declined by $21,077 during the quarter, from $92,313 to $71,236. Investing activities provided $3,299.
Material changes and financing
- Revenue and gross profit declined year over year; SG&A rose, contributing to a substantially larger operating and net loss.
- Operating cash flow changed from positive $319,557 in the prior-year quarter to negative $77,478.
- Common shares outstanding rose from 49,065,669 at September 30 to 54,724,805 at December 31. The filing reports 55,786,573 shares outstanding as of February 6, 2012.
- The company continued using an equity drawdown agreement with Ascendiant, allowing up to $3 million of stock sales subject to conditions and market-volume limits. It had issued shares for $145,850 under the facility by December 31, and for $201,640 by February 6, excluding specified fees.
- A 10% convertible debenture issued in 2011 was due May 1, 2012. Its remaining principal was reported as $1.075 million at quarter-end. Conversion terms include a market-linked price and potential dilution; the filing warns that additional registration and share issuance may be required.
Outlook, risks and unusual items
Management states that additional financing is needed to execute its business plan, meet debt repayments and pursue acquisitions, and warns that funding may not be available on acceptable terms or at all. It says the company expects operating losses for the foreseeable future. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern; the financial statements contain no adjustments for a possible failure to continue as a going concern. Management warns that failure to obtain financing could require restructuring, divestiture or bankruptcy.
Key risks include limited liquidity, near-term debt obligations, reliance on equity and convertible financing, shareholder dilution, possible pressure on the stock price from registered resale shares, volatile trading, and execution and integration risks from acquisitions. The company reported no pending legal proceedings expected to have a material adverse effect. Management concluded that disclosure controls were effective as of December 31, 2011 and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Confirm the filing identity: the supplied metadata names USBC, Inc., while the filing is for Visualant, Inc.
- Assess the company’s ability to obtain financing and meet the May 2012 convertible-note maturity and the $650,000 June 2012 payment to James Gingo.
- Verify the complete debt and liquidity picture, including the distinction between the $2.62 million debt schedule and the separately reported $1.075 million convertible-note balance.
- Review potential dilution from convertible debt, warrants, registered resale shares and the Ascendiant equity drawdown facility.
- Check the reported October 2011 Gemini conversion share count: the filing text contains an unclear figure (“2,619.261 shares”) in one passage, while other disclosures refer to 2,619,261 shares.
- Monitor whether SPM commercialization, licensing and TransTech profitability improve revenue, margins and operating cash flow.