Filing summary
Identity and period: The supplied filing is a Visualant, Incorporated (ticker VSUL) Form 10-Q for the quarter ended June 30, 2013, covering the three and nine months then ended. This does not match the request metadata identifying USBC, Inc.; verify the issuer and filing before relying on this summary.
Business context and financial performance
Visualant combined TransTech Systems, a distributor of security and authentication products, with development and commercialization of its ChromaID material-identification technology. Management said TransTech supplied the majority of current revenue; ChromaID was expected to be a major source of revenue in future years. SPP, a Japanese partner, held an exclusive ChromaID license in certain Asian territories and a joint development agreement extended through December 31, 2013.
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $2.060 million, up 13.6% | $6.334 million, up 14.6% |
| Gross profit and margin | $418,000; 20.3% (prior-year 19.6%) | $1.526 million; 24.1% (prior-year 18.3%) |
| Operating loss | $941,000 (prior-year $743,000) | $2.765 million (prior-year $1.840 million) |
| Net loss attributable to common shareholders | $2.403 million; $0.02 per share | $5.448 million; $0.05 per share |
For the nine-month period, management attributed revenue growth to $667,000 of SPP license revenue and increased TransTech sales. The SPP license fee was fully recognized by May 31, 2013. R&D expense rose to $720,000 from $99,000, reflecting ChromaID commercialization and the SPP development work; SG&A rose to $3.571 million from $2.754 million.
Cash, debt and liquidity
- At June 30, cash was $1.510 million and restricted cash was $200,000. The cash-flow statement reports ending cash and cash equivalents of $1.710 million, equal to those balance-sheet amounts combined.
- Current assets were $3.304 million and current liabilities $7.324 million, including a $4.184 million warrant derivative liability. Management reported working capital of about $164,000 excluding that derivative liability; on the reported balance-sheet totals, working capital was negative about $4.020 million.
- Total debt was $686,000, nearly all current. The company repaid the remaining $1.0 million TransTech acquisition note to James Gingo in June. A $200,000 Umpqua Bank note was collateralized by $200,000 of restricted cash; the BFI facility was renewed through December 2013.
- Operating cash use was $2.487 million in the cash-flow statement, versus cash provided of $407,000 in the prior-year period. Investing used $12,000; financing provided $3.067 million, including $4.852 million of net common-stock issuance proceeds and $1.900 million of debt repayments.
- On June 14, the company closed a private placement of 52.3 million shares at $0.10 per share for $5.230 million, including conversion of $500,000 of officer debt. It also issued 52.3 million Series A warrants at $0.15 and 52.3 million Series B warrants at $0.20, each with a five-year term.
Material changes, outlook and risks
- Although revenue and gross margin improved, operating losses widened, and nine-month net loss increased to $5.463 million from $1.925 million. Other expense included a $1.449 million noncash loss from revaluing warrant liabilities and a $1.150 million loss associated with purchasing warrants and terminating an additional investment right.
- The company reported an accumulated deficit of $19.379 million and stated that recurring losses and the need for additional working capital raised substantial doubt about its ability to continue as a going concern. Management expected losses to continue and said additional financing would be needed; it gave no quantified earnings or revenue guidance.
- Management said private-placement proceeds would support operations, debt payments and ChromaID development, but warned that proceeds might not cover near-term obligations and further financing might be needed. Exercise of the investor warrants could provide up to $18.305 million before fees, but exercise is not assured.
- Risks include significant potential shareholder dilution from outstanding warrants and options, possible warrant exercise-price adjustments under down-round provisions, dependence on the SPP relationship and its December 2013 agreement term, and reliance on key personnel. The company also disclosed that its disclosure controls were not effective because its audit committee lacked a financial expert.
- Visualant sued Ascendiant after Ascendiant allegedly failed to deliver 1,715,475 of 4.0 million shares Visualant had paid $300,000 to purchase. The company sought specific performance and injunctive relief; the filing said the court was reviewing its complaint.
- Subsequent to quarter-end, shareholders approved increasing authorized common shares to 500 million on August 9, 2013. A resale registration statement covering 70.3 million shares had been filed July 3.
Important facts to verify
- Confirm the issuer: the filing text identifies Visualant, Incorporated, not USBC, Inc.
- Reconcile operating cash used: the cash-flow statement reports $2.487 million, while MD&A and the going-concern note cite $2.469 million.
- Review the warrant accounting, dilution potential, and the filing’s differing stated expected-volatility assumptions (82% and 143%).
- Assess cash needs against near-term debt and other obligations, and whether further financing or warrant exercises occurred.
- Check the outcome of the Ascendiant share-delivery litigation and the commercial progress of ChromaID and the SPP agreement.